SBB Steel Markets Middle East 2009
Dubai
Have the fundamentals of the steel industry changed?
Siddhartha Sengupta
Hatch Beddows
FUNDAMENTALS OF STEEL INDUSTRY
Contents
•
Hatch, Hatch Consulting, and Hatch Beddows
•
Objective
•
Drivers of steel consumption
•
The China issue
•
Evolving landscape
•
Implications for Middle East
•
Conclusions
© Hatch Associates Limited, 2009
2
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HATCH CONSULTING
Hatch Consulting is the leading management consultancy dedicated to the
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HATCH BEDDOWS STRATEGY CONSULTING
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HATCH BEDDOWS STRATEGY CONSULTING
Hatch Beddows’ strategy consulting experience spans the whole of the value
chain from raw materials to finished steel to processed products for a
comprehensive perspective
•
Raw materials and consumables
– Iron ore, pellet and sinter
– Coking coal and coke
– Metallics: scrap, pig iron, DRI / HBI
– Ferroalloys: Cr, Mn, Ni, Si
– Refractories
•
Semi-finished steel
– Slab
– Billet and bloom
•
Long products
– Rebar
– Merchant bars
– Structural sections
– Wire rod and wire products
– Engineering bars
– Rails
– Grinding balls
•
Reversing mill / Steckel mill plate
•
Strip mill products
– HR sheet / plate
– CR sheet
– Electrical steels
– Galvanised sheet
– Organic coated sheet
– Tin mill products
– Tailor-welded blanks
•
Pipe and tube
– OCTG and line pipe
– Seamless and welded tubes
– Hollow sections
•
Stainless steel
•
Speciality steels and special metals
© Hatch Associates Limited, 2009
11
FUNDAMENTALS OF STEEL INDUSTRY
Contents
•
Hatch, Hatch Consulting, and Hatch Beddows
•
Objective
•
Drivers of steel consumption
•
The China issue
•
Evolving landscape
•
Implications for Middle East
•
Conclusions
© Hatch Associates Limited, 2009
12
FUNDAMENTALS OF STEEL INDUSTRY
The objective of this paper is to examine the fundamentals of steel industry in
light of the changed economic landscape
•
This paper addresses the following objectives:
–
–
–
Has the changed economic landscape changed the fundamentals of the steel industry?
What are the structural challenges and opportunities for the industry?
How have the fundamentals of the industry in the Middle East likely to hold in the future?
© Hatch Associates Limited, 2009
13
FUNDAMENTALS OF STEEL INDUSTRY
Population clusters and their location will continue to drive steel consumption
and the location of the steel industry
Major Regions of Population and GDP
Each red dot is 100,000 people
•
•
The North Atlantic basin
and the Pacific / Indian
rim account for 77% of
the global population and
95% of the economic
activity.
POPULATION
GDP (ppp)
18%
53%
59%
36%
Steel consumption and
steel plant locations
match such population
and economic clusters
closely.
77% of global population
95% of economic activity (89% in ppp)
Source: ICAP HYDE
© Hatch Associates Limited, 2009
14
FUNDAMENTALS OF STEEL INDUSTRY
There is a clear relationship between average incomes levels and steel
consumption per capita…
Finished steel consumption and income per capita
1,000
Korea
Steel cons Text
/ capita, kg
Taiw an
750
Japan
Czech Republic
500
Italy
Spain
Canada
Sw eden
Germany
250
China
Thailand
Ukraine
Egypt
Vietnam
India
Philippines
Nigeria
Indonesia
USA
Australia
Slovakia
Malaysia
Saudi Arabia
Rus.
Hungary
Poland
Mexico
France
UK
Argentina
Brazil
S.Africa
0
Nigeria
0
5
10
15
20
25
30
35
40
45
GDP / capita, US$'000 (PPP basis)
Data: Hatch Beddows, WSA, IMF. Note: 2005 data. PPP – purchasing power parity
© Hatch Associates Limited, 2009
15
FUNDAMENTALS OF STEEL INDUSTRY
Adding a second dimension we can see that this relationship is sustained
over time; as average incomes rise steel consumption per capita tends
also to rise
The r curve relationship between steel consumption and income
Steel cons / capita, kg
1,000
1,000
Korea
750
750
Japan
500
500
1975
250
2004
250
China
0
0 0
0
5
5
10
15
20
15US$'000 (PPP
20 basis)
Real10
GDP / capita,
25
25
30
30
Data: Hatch Beddows, WSA, IMF. Note: PPP – purchasing power parity
© Hatch Associates Limited, 2009
16
FUNDAMENTALS OF STEEL INDUSTRY
There is a close correlation between growth in industrial production and steel
consumption (1)
Correlation between industrial production and steel consumption
YoY change in steel cons.
15%
10%
5%
0%
-5%
-10%
-2%
r2 = 0.51
-1%
0%
1%
2%
3%
4%
5%
6%
YoY change in world industrial production
Data: Hatch Beddows, WSD, OEF. Note: Annual data from 1986-2006
© Hatch Associates Limited, 2009
17
FUNDAMENTALS OF STEEL INDUSTRY
There is a close correlation between growth in industrial production and steel
consumption (2)
Trends in changes in global steel consumption and IP
14%
12%
10%
8%
6%
4%
2%
0%
-2%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-4%
-6%
World IP growth
World steel consumption growth*
Data: Hatch Beddows, SBB, CHR Economics.
* crude steel basis
© Hatch Associates Limited, 2009
18
FUNDAMENTALS OF STEEL INDUSTRY
Adding a third dimension underscores potential for growth in steel demand.
Half of the world’s population lives in high-growth developing countries
Steel consumption and GDP per capita
1,000
Korea
Steel cons. per capita, kg
Taiwan
800
Japan
600
China
M. East
400
EU-15
India
USA
A-10
200
Russia
Mexico
Brazil
0
Indonesia
-200
0
10
20
30
GDP per capita (PPP basis), US$'000
40
50
Data: Hatch Beddows, WSA, IMF, UN. Size of bubbles is proportional to size of population in each country or region
© Hatch Associates Limited, 2009
19
FUNDAMENTALS OF STEEL INDUSTRY
Significant investments are required in India to support the rising urbanisation
and movements of rural people to cities. Therefore steel consumption is likely to
increase in the future
India as an example
Urbanisation rates in India are low
but it is at a point of take off ......
...... resulting in massive movements of
rural people to the cities
...... therefore requiring significant
investments in
90%
Housing
80%
70%
By 2020 : 140 million
60%
Infrastructure
50%
Transport
40%
By 2050 : 700 million
30%
Power
20%
10%
Education
India
S. Korea
China
Malaysia
0%
Source : Hatch Beddows previous experience, Goldman Sachs
Healthcare
© Hatch Associates Limited, 2009
20
FUNDAMENTALS OF STEEL INDUSTRY
Construction spend will continue to drive half of steel consumption. The threat
to substitution of steel by other materials is over rated
Sectors
•
•
Breakdown of global steel demand by sectors
Not all global steel demand is driven by automotive
industry. The influence of automotive sector on steel
demand is over rated despite it accounting for only 15%
of the total demand.
Fixed assets investments includes construction,
shipbuilding, engineering and machine building will be the
key drivers of steel demand in both developing and
developed countries.
75% demand
60%
50%
50%
40%
30%
Substitution
20%
•
10%
The threat of substitution of steel by other materials such
as aluminium, plastics is over rated.
25%
15%
5%
3%
2%
Source: WSA, WSD and Hatch Beddows
© Hatch Associates Limited, 2009
Packaging
Automotive
In construction, there is an opportunity for steel to
substitute other materials such as concrete.
Other
•
Engineering
Steel in construction, shipbuilding and engineering cannot
be suitably substituted by other materials.
Shipbuilding
•
Construction
0%
21
FUNDAMENTALS OF STEEL INDUSTRY
Corus successfully displaced reinforced concrete as the preferred material in
commercial buildings in the UK
Use of Steel Frames for Multi-storey
Office Buildings in the UK
UK Market Share for Multi-storey Buildings
80
70
70
Market Share of Floor Area (%)
Market Share of Number of Buildings (%)
80
60
50
40
30
20
10
Structural Steel
Total Concrete
60
Masonry
50
Timber
40
30
In-situ concrete
cast averages 90%
of ‘Total Concrete’,
the remainder
being pre-cast
20
10
0
2000
0
1998
1999
1996
1995
1994
1990
1992
1985
1990
1980
Source: Corus, Construction Markets (2000), Hatch Beddows
© Hatch Associates Limited, 2009
22
FUNDAMENTALS OF STEEL INDUSTRY
Contents
•
Hatch, Hatch Consulting, and Hatch Beddows
•
Objective
•
Drivers of steel consumption
•
The China issue
•
Evolving landscape
•
Implications for Middle East
•
Conclusions
© Hatch Associates Limited, 2009
23
FUNDAMENTALS OF STEEL INDUSTRY
Consolidation has increased in the global steel industry but China, the largest
steel producing country, remains fragmented
Top 5 steel producers share of regional
production 2008 (%)
0
20
40
60
80
100
Crude steel capacity 2008 ( Mt)
0
100
83
Japan
200
300
400
500
600
700
149
Japan
71
S. America
88
S. America
69
252
EU
EU
67
N. America
149
N. America
145
46
CIS
CIS
29
China
About 800
producers
600
China
20
Global avg.
Source: WSA, James King Plant Database, Hatch Beddows
© Hatch Associates Limited, 2009
24
FUNDAMENTALS OF STEEL INDUSTRY
High steel making costs in China has put a cap on floor prices. Domestic
steel prices in China continue to trail behind prices in rest of the world
Domestic HRC price trends ( USD/t)
Cash costs at liquid steel stage (USD/t)
1400
500
1200
400
1000
300
800
200
600
100
400
200
0
Europe
US
China
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Other
0
Jan-02
Raw Materials
Middle
East
Jan-01
Russia
Jan-00
Brazil
Jan-99
China
Jan-98
W.
Europe
M. East
Source: SBB, Tex report, MB, AMM, Hatch Beddows
© Hatch Associates Limited, 2009
25
FUNDAMENTALS OF STEEL INDUSTRY
Chinese steel growth has remained delinked from the world, even during 2009.
When capacity utilisation is low, we see large surges in export volumes, helped
by trailing prices
Steel consumption growth* (%)
Capacity utilisation (%) versus exports (MT) in China
30%
120%
9.0
8.0
20%
100%
7.0
80%
6.0
10%
5.0
60%
4.0
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0%
40%
3.0
2.0
-10%
20%
1.0
-20%
World
China
Source : WSA, Hatch Beddows
World Ex China
Exports (LHS)
July'09
May'09
Mar'09
Jan'09
Nov'08
Sep'08
July'08
May'08
-30%
Mar'08
0%
Jan'08
0.0
Cap. utilisation (RHS)
*crude steel basis
© Hatch Associates Limited, 2009
26
FUNDAMENTALS OF STEEL INDUSTRY
In 2009, a massive 20% increase in FAI is sustaining a 11% increase in
Chinese steel consumption offsetting a decrease in steel processed into
exported goods. Can this be sustained for the next few years?
Trends in FAI and finished steel consumption
growth in China (%)
30%
Breakdown of China’s finished steel consumption
2008 - 475Mt
25%
100Mt
steel processed
into exported
goods
20%
15%
375Mt
consumed
domestically
10%
5%
2009 - 529Mt ( E)
FAI growth ( real)
2009 (e)
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0%
Finished steel consumption
60Mt
steel processed
into exported
goods
469Mt
consumed
domestically
Source : Dragonomics economic research, WSA, Hatch Beddows
© Hatch Associates Limited, 2009
27
FUNDAMENTALS OF STEEL INDUSTRY
China has never been fully successful with capacity rationalisation. In their
defence it must be said that the task is immensely complex with no previous
parallels and there are too many producers!
•
Crude steel capacity growth in China (Mt)
800
Capacity build-up in China is happening on
number of fronts and does not follow a
central government generated vision plan:
110Mt
–
–
–
700
600
500
Central government funded projects
Provincial government funded projects
Private enterprises
•
China has never been successful in
implementing capacity rationalisation. The
process can be distorted due to
considerations of social unrest,
unemployment and tax revenues.
•
China will continue to build capacities
because this is domestic demand driven
and there is no other superior economic
alternative.
400
300
200
100
2008
2009
2010 (E)
Source: SBB, CISA, Hatch Beddows
© Hatch Associates Limited, 2009
28
FUNDAMENTALS OF STEEL INDUSTRY
Contents
•
Hatch, Hatch Consulting, and Hatch Beddows
•
Objective
•
Drivers of steel consumption
•
The China issue
•
Evolving landscape
•
Implications for Middle East
•
Conclusions
© Hatch Associates Limited, 2009
29
FUNDAMENTALS OF STEEL INDUSTRY
Consumption could recover to 2008 levels by 2012. Recovery could be diluted
due to capacity overhang , less in China but more so in World ex China i.e US,
EU and Japan
Steel consumption forecasts* ( Mt)
Forecast capacity utilisation ( Mt)
100%
1600
Forecasts
Forecasts
1400
80%
1200
60%
1000
800
40%
600
400
20%
200
0%
0
2008
2009
China
Source: Hatch Beddows
2010
2011
2012
2008
2009
China
World Ex China
2010
2011
2012
World Ex China
*crude steel basis
© Hatch Associates Limited, 2009
30
FUNDAMENTALS OF STEEL INDUSTRY
We are likely to see a more stronger pricing recovery than finished steel
consumption recovery
•
An increasing demand for steel from China is likely to push up raw materials prices.
•
An increase in raw materials will push costs and prices of finished steel.
•
With the steel industry being more consolidated in EU, N. America and Japan, these price increases will
likely be passed on customers. This is where it breaks away from trends in 1980, when the balance of
negotiation power was with customers.
•
Prices in China and in the Middle East are likely to follow similar trends. But Chinese prices will continue
to trail behind international prices due to lesser consolidation.
•
Higher raw materials prices will benefit vertically integrated producers like Severstal, NLMK, even more.
•
Therefore we are likely to see a more stronger pricing recovery than finished steel consumption
recovery.
•
Expect volatility in prices and exports! As demand and prices recovers, production, inventory and exports
could overshoot consumption !
© Hatch Associates Limited, 2009
31
FUNDAMENTALS OF STEEL INDUSTRY
The capital markets are re-rating the steel industry and clearly favour the
low cost producers (1)
Overall EBITDA margin vs. enterprise value/sales multiplier for EU and low
cost steel producers based on 2008 reported results
40%
Usiminas - Brazil
35%
Evraz - Russia
BRICs based low
cost producers
Ruukki - Finland
EBITDA Margin/%
30%
25%
Severstal - Russia
Gerdau - Brazil
20%
Tata Steel - Corus
15%
Salzgitter - Germany
EU high cost
producers
10%
TKS - Germany
Corus – UK/NL
5%
0%
0
0.5
1
1.5
2
2.5
3
EV/Sales
Note: Note: Enterprise Value ("EV") calculated as Market Capitalisation + Net Debt
Corus Group and Tata Steel before their merger
Source:Bloomberg and Hatch Beddows
© Hatch Associates Limited, 2009
32
FUNDAMENTALS OF STEEL INDUSTRY
The capital markets are re-rating the steel industry and clearly favour the low
cost producers (2)
Overall EBITDA margin vs. enterprise value/sales multiplier for EU and low
cost steel producers based on 2006/2007 reported results
45%
Tata Steel - India
40%
BRICs based low
cost producers
EBITDA Margin/%
35%
Usiminas - Brazil
Evraz - Russia
30%
Severstal - Russia
25%
Gerdau - Brazil
20%
Ruukki - Finland
15%
Corus – UK/NL
Salzgitter - Germany
10%
EU high cost
producers
TKS - Germany
5%
0%
0
0.5
1
1.5
2
2.5
3
EV/Sales
Note: Note: Enterprise Value ("EV") calculated as Market Capitalisation + Net Debt
Corus Group and Tata Steel before their merger
Source:Bloomberg and Hatch Beddows
© Hatch Associates Limited, 2009
33
FUNDAMENTALS OF STEEL INDUSTRY
The period of the medium term dynamics will depend largely on how rapidly
governments in US, EU and Japan can revive the economies. So far, only a crisis
has been averted!
Developing dynamics in the global steel industry
Phase
‘Stronger for longer’
dampened by
Increase in
prices
Capacity
overhang
Recovery
in profitability
Consumption
growth
Increased
consolidation
Lesser
utilisation
Strong
raw material
prices
Increasing
China
consumption
Increase in
costs
Increase in
raw material
prices
Supply
constraints
capacity
rationalisation
Increased
competition
greenfield
projects
relevant to
China than
other regions
Medium term
© Hatch Associates Limited, 2009
34
FUNDAMENTALS OF STEEL INDUSTRY
Contents
•
Hatch, Hatch Consulting, and Hatch Beddows
•
Objective
•
Drivers of steel consumption
•
The China issue
•
Evolving landscape
•
Implications for Middle East
•
Conclusions
© Hatch Associates Limited, 2009
35
FUNDAMENTALS OF STEEL INDUSTRY
Consumption of flat products in the Middle East will be driven by - oil prices,
construction spend, population growth, industrial growth policy
•
Hatch Beddows is of the view the fundamentals driving steel consumption in the Middle East has not
changed in the economic crisis.
–
Oil and gas prices
–
Population growth
–
Construction spend
–
Industrial growth policy
© Hatch Associates Limited, 2009
36
FUNDAMENTALS OF STEEL INDUSTRY
The pressures of a growing population in the Middle East ( twice the world
avg. growth rates) are forecast to continue in the next 15 years
Historical and forecast population in GCC and OMEC
(millions)
140
Historical and forecast of world population
(billions)
9
CAGR ~2.3%
120
CAGR ~1.01%
8
7
100
6
80
5
4
60
3
40
2
20
1
0
0
1998
2007
2012
GCC
2017
2022
1998
2007
2012
2017
2022
OMEC
Source : US Census Bureau, Hatch Beddows
© Hatch Associates Limited, 2009
37
FUNDAMENTALS OF STEEL INDUSTRY
The oil demand and price scenario, despite short term volatility, is still very
strong and robust
•
The following consensus views on oil consumption
drives our confidence:
–
There is a clear consensus among oil producers,
governments, consultants and stake holders that oil
and gas will continue to maintain a substantial
share in the energy mix.
–
Bulk of the oil demand increase in the next decade
is likely to come from China and India, both the
economies are maintaining growth during 2009.
–
The ongoing economic crisis inadvertently also
tightened oil supply.
–
An oil price spike in the medium term cannot be
ruled out
Source : EIA, DOE
© Hatch Associates Limited, 2009
38
FUNDAMENTALS OF STEEL INDUSTRY
A combination of competitive steel making costs and growing local consumption
is likely to attract investments in capacity building in the Middle East
500
CRC consumption in GCC
and neighbouring regions (Mt)
Cash costs at liquid steel stage (USD/t)
800
400
700
300
600
500
200
400
300
100
200
0
W.
Europe
China
Raw Materials
Brazil
Russia
Middle
East
100
0
Other
2008
2015
Source : Hatch Beddows
© Hatch Associates Limited, 2009
39
FUNDAMENTALS OF STEEL INDUSTRY
Contents
•
Hatch, Hatch Consulting, and Hatch Beddows
•
Objective
•
Drivers of steel consumption
•
The China issue
•
Evolving landscape
•
Implications for Middle East
•
Conclusions
© Hatch Associates Limited, 2009
40
FUNDAMENTALS OF STEEL INDUSTRY
Hatch Beddows is fundamentally bullish on the steel industry in the Middle
East and the region is expected to continue its growth in a steel intensive
economic development curve
•
Despite the current crisis, Hatch Beddows does not anticipate a discontinuity in demand in
developing regions such as China, Middle East and India.
•
The Middle East will continue to “climb” the economic development curve and this phase is
steel intensive.
•
We expect the industry consolidation in China and Middle East will increase. In China, the
consolidation process may not reach the levels in EU, N. America and Japan in many
years to come but it will still be a significant improvement over the past.
•
The lower cost producers, specifically the vertically integrated ones, will have access to
capital and flexibility in capacity adjustments strengthening their competitive position. The
industry is are more likely to behave rationally than in the past 3 decades.
•
The capacity overhang in China is a threat but these are more cyclical in nature and not
structural. The problems in N. America, Europe and Japan are much more serious.
© Hatch Associates Limited, 2009
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HATCH BEDDOWS STRATEGY CONSULTING
Please contact us for further information
Hatch Beddows Strategy Consulting
9th Floor, Portland House, Bressenden Place, London, SW1E 9BH, UK
+44 20 7906 5100 (switchboard)
www.hatch.ca/hatchbeddows
Siddhartha Sengupta
Managing Consultant
+44 20 7906 5123
Fax
+44 20 7233 1908
ssengupta@hatch-europe.com
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© Hatch Associates Limited, 2009
42